Apple last night announced an ambitious push into Hollywood movies and video games with plans to distribute both through its iTunes website which has so spectacularly shaken up the music business.

Apple's chief executive Steve Jobs said that with immediate effect in the US and from next year in rest of the world, iTunes users would be able to download blockbusters of "near DVD quality" for $12.99 (about £7) on the day of their video release.

Arcade games playable on the latest generation of iPods will go on sale straight away in the UK priced at £3.99, with the first batch of nine including MahJong, Pac-Man and Vortex.

In a slew of announcements outlining the Californian company's innovations, Mr Jobs revealed changes too to iTunes, which has become the world's biggest online jukebox with 1.5 billion songs sold.

The website has been upgraded to display the artists' album artwork with every song on the user's computer, regardless of whether it has been purchased from Apple. A new scroll function will allow users to flick through the album covers as if they were thumbing through a record collection.

Picture quality on the players has been increased four-fold to 640x480 resolution, making the watching of films more viable.

At first the movies will come from a tie-up with four studios - Walt Disney and its three subsidiaries Pixar, Touchstone and Miramax, allowing access to films such as Pirates of the Caribbean, Shakespeare In Love and Cars.

But Apple is confident that other Hollywood studios will follow suit, enabling computer-users to watch films on their computers or hand-held iPods on the same day as they are released on video.

In the long run Apple expects these films, along with photos and music, will be viewed on domestic televisions and has invented a new wireless product to do just that. Provisionally called iTV the gadget will be launched next year priced at $299 in the US (£160, although British prices are usually higher).

Selling films opens yet another front for Apple following its move into the television shows, which began with shows from just one broadcaster, ABC - also owned by Disney whose shareholders include Mr Jobs - but which now spans the 40 major US networks.

"Here we go again. First music, then TV shows, and now movies," Mr Jobs said at a briefing in San Francisco.

"In less than a year we've gone from offering just five TV shows to offering over 200 TV shows and we hope to do the same with movies. iTunes is selling over one million videos a week and we hope to match this with movies in less than a year."

Dick Cook, the chairman of Walt Disney Studios, said: "Not only are we proud to be expanding our association with Apple but we feel this venture meets a growing demand for movie viewing that will ultimately expand the market for our films."

Amid criticism of the battery life and reliability of iPods, Mr Jobs also announced several changes to its range of hand-held music and video players.

The next generation of iPods will have 60GB and 30GB memory, allowing the storage of up to 20,000 songs or 100 hours of videos, and come with new headphones, 75 per cent longer battery life and an internet-style search function, priced at £259 for the 80GB version and £189 for the 30GB.

The smaller iPod Nano, the most popular music player in the world, will become thinner, have batteries lasting 24 hours and come in five colours priced between £99 and £169.

The even smaller iPod Shuffle will get smaller too, becoming the smallest MP3 player in the world with an area about half the size of a credit card. Designed to be clipped to clothing, it is scheduled to go on sale next month priced at £55.

The innovations come as a new music website, emusic, challenges Apple's dominance of the European download market. Emusic will offer users cheaper downloads from a choice of one million songs - a third of Apple's archive. Carrying reviews from music journalists, the new site has the backing of small independent labels but the major record companies are not taking part, wary of its lower price and lack of anti-piracy measures.